Texas Comptroller of Public Accounts    STAR System


9805405R



STAR SUPERSEDED WITHOUT SUMMARY 

Accession No.(s): 9805405R

Document superseded on: 08/15/2013 



STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
FRANCHISE TAX


Section 3.562.  Limited Liability Companies.  (Tax Code, sec. 171.001 et. 
seq.).

(a) Effective date.  The provisions of this section apply to franchise tax 
reports originally due on or after August 26, 1991. 

(b) Definitions.  The following words and terms, when used in this section, 
shall have the following meanings, unless the context clearly indicates 
otherwise. 

(1) Limited liability company-A company organized and existing under the 
provisions of the Texas Limited Liability Company Act or a foreign limited 
liability company described in the Act, Article 1.02 A(9). 

(2) Internal Revenue Code-

(A) For reports originally due on or after January 1,1998, the Internal Revenue 
Code (IRC) of 1986 in effect for the tax year beginning on or after January 1, 
1996, and before January 1, 1997.

(B) For reports originally due on or after January 1, 1996, and before January 
1, 1998, the Internal Revenue Code  of 1986 in effect for the tax year 
beginning on or after January 1, 1994, and before January 1, 1995.

(C) For reports originally due on or after January 1, 1992, and before January 
1, 1996, the Internal Revenue Code of 1986 in effect for the tax year beginning 
on or after January 1, 1990, and before January 1, 1991 (1990 IRC). 

(D) The franchise tax law requires that the 1990 IRC be used for reports 
originally due prior to January 1, 1996.  Because of this requirement, there 
may be differences between federal taxable income reported for federal income 
tax purposes and reportable federal taxable income for franchise tax purposes 
for franchise tax reports originally due prior to 1996.  To the extent that 
such differences exist, the 1990 IRC must be used to report the differences for 
reports originally due on or after January 1, 1996.  For example, if a 
corporation was denied any portion of an IRC sec. 179 deduction on an asset in 
computing taxable earned surplus on a franchise tax report due prior to January 
1, 1996 (because the sec. 179 deduction exceeded the $10,000 limit allowed 
under the 1990 IRC), the corporation will be allowed to compute depreciation on 
the asset based on the 1990 IRC (i.e., the corporation may depreciate the asset 
based on the $10,000 sec. 179 deduction allowed under the 1990 IRC) for reports 
originally due on or after January 1, 1996. 

(3) C corporation-A corporation defined in Internal Revenue Code, sec. 
1361(a)(2). 

(4) Tax reporting period-For the purposes of this section, the period upon 
which the tax is based under the Tax Code, sec. 171.1532 or sec. 171.0011. 

(c) Taxable capital.  To determine the taxable capital of a limited liability 
company, add the company's members' contributions, as provided for under the 
Texas Limited Liability Company Act, and surplus. 

(1) The Texas Limited Liability Company Act, Article 5.01A, provides that the 
contribution of a member may be in cash, property or services rendered, or a 
promissory note or other obligation to pay cash or transfer property to the 
limited liability company. 

(2) A member's contribution is the sum of the cash contributed and the agreed 
value of any other contribution made plus the amount of cash and the agreed 
value of any other contribution which the member has agreed to make in the 
future as an additional contribution, provided that the promise by a member to 
make a contribution to, or otherwise pay cash or transfer property to, the 
limited liability company is set out in writing and signed by the member. 

(d) Earned surplus.  Where and to the extent a limited liability company 
allocates income and deductions to its members for federal income tax, such 
items will be treated as income and deductions in determining earned surplus of 
the limited liability company as though it were taxed as a C corporation for 
federal income tax purposes. 

(l) Federal income tax requirements or limitations imposed on the limited 
liability company apply for purposes of this section. 

(2) Unless otherwise provided, federal income tax limitations or other 
restrictions imposed on the members of the limited liability company with 
regard to claiming losses, deductions, and other items are ignored in 
determining taxable earned surplus of the limited liability company. 

(e) Limited liability company treated as partnership for federal income tax 
purposes.  Treatment of specific items reported to limited liability company 
members in computing reportable federal taxable income for earned surplus 
purposes. 

(1) Ordinary income from trade or business activities is included and ordinary 
losses from such activities are deducted. 

(2) Net income from rental activities is included and net losses are deducted. 

(3) Taxable interest is included unless the interest qualifies for exclusion 
under the provisions of sec. 3.555(k) of this title (relating to Earned 
Surplus: Computation).  Interest income which is exempt from federal income tax 
is excluded and expenses related to such income are not deductible in computing 
reportable federal taxable income. 

(4) Dividend income received by a limited liability company is included except 
for: 

(A) amounts reportable under the Internal Revenue Code, sec. 78 or secs. 
951-964; 

(B) dividends from a subsidiary, associate, or affiliate that does not transact 
a substantial portion of its business in the United States.  If 80% or more of 
a corporate payor's gross receipts (as computed for earned surplus) are 
attributable to business outside the United States, the corporate payor is not 
doing a substantial portion of its business within the United States.  The 
payor's gross receipts are measured based on the period upon which the 
recipient's tax is based under the Tax Code, sec. 171.0011 or sec. 171.1532;

(C) dividends from a subsidiary, associate, or affiliate that does not maintain 
a substantial portion of its assets in the United States.  If 80% or more of a 
corporate payor's tangible assets (based on original cost) are situated outside 
the United States, the corporate payor does not maintain a substantial portion 
of its assets within the United States.  The payor's assets are valued at the 
end of the tax reporting period upon which the recipient's tax is based under 
the Tax Code, sec. 171.0011 or sec. 171.1532; and

(D) dividends which qualify for exclusion under the provisions of sec. 3.555(k) 
of this title (relating to Earned Surplus: Computation). 

(5) Royalty income is included. 

(6) Payments made to members which qualify as guaranteed payments under 
Internal Revenue Code, sec. 707(c), and which constitute ordinary and necessary 
business expenses under Internal Revenue Code, sec. 162, but are not subject to 
Internal Revenue Code, sec. 263, are deductible. 

(7) Salaries and wages used in computing ordinary income or loss are allowed in 
computing reportable federal taxable income after deduction for any jobs credit 
claimed on the limited liability company federal income tax return.  Other 
expenses which are reduced for credits claimed on the federal income tax return 
similarly are allowed net of such credits. 

(8) Deductions for charitable contributions are allowed. 

(9) Capital losses in excess of capital gains are deductible. 

(10) If deductions for oil and gas depletion or intangible drilling costs are 
allowable to members of a limited liability company rather than to the entity 
itself, the limited liability company must compute such deductions as though 
the entity were taxed as a C corporation for federal income tax purposes. 

(11) The limited liability company is allowed to deduct Internal Revenue Code, 
sec. 179, amounts reported to members, subject to limitations imposed on the 
limited liability company as if it were taxed as a C corporation. 

(12) A limited liability company may deduct foreign income taxes reported to 
members unless the taxes are otherwise deducted in computing taxable items 
reported to members. 

(13) No deduction is allowed for amounts reported to members which are personal 
expenses even though such items may qualify as itemized deductions on the 
member's income tax return. 

(f) Limited liability company treated as sole proprietorship for federal income 
tax purposes.

(1) The reportable federal taxable income of the limited liability company will 
be the taxable income and deductions reported on the sole proprietor's 
individual income tax return, including any schedules and attachments to the 
sole proprietor's income tax return that relates to the limited liability 
company.

(2) The limited liability company may not deduct any amounts for compensation 
of the member who is treated as the sole proprietor for federal income tax 
purposes.

(g) Single member limited liability company which is treated as a division or 
branch of a corporation for federal income tax purposes.  The reportable 
federal taxable income of the limited liability company will be computed as 
though the limited liability company were a separate corporation for federal 
income tax purposes.  Therefore, the reportable federal taxable income will be 
computed under the provisions of Texas Tax Code sec. 171.110(d).

(h) Limited liability company treated as corporation for federal income tax 
purposes.  The reportable federal taxable income of the limited liability 
company will be computed under the provisions of Texas Tax Code sec. 171.110(d) 
as if the limited liability company were a corporation.

(i) Officer and director compensation.  See sec. 3.558 of this title (relating 
to Earned Surplus: Officer and Director Compensation) regarding compensation 
used in computing earned surplus of a limited liability company. 

(j) Corporate members of limited liability companies. 

(1) Taxable capital. 

(A) A corporate member of a limited liability company must use the cost method 
of accounting for its investment in the limited liability company. 

(B) Cost is the original valuation of the investment under Generally Accepted 
Accounting Principles.  There will be no adjustment for the member's 
distributive share of the limited liability company's items of income or loss 
as reported annually by the limited liability company.  The cost of an investee 
(limited liability company) will be reduced by distributions and/or withdrawals 
from the investee insofar as such distributions represent a return of capital. 

(C) To the extent a distribution and/or withdrawal from the limited liability 
company is made up of current or previous undistributed earnings of the limited 
liability company and not a return of capital, it is included in gross receipts 
for taxable capital of the receiving corporate member.  These distributions 
and/or withdrawals are apportioned based on the state of organization of the 
payor (limited liability company). 

(2) Earned surplus. 

(A) For the portion of a tax reporting period during which a limited liability 
company is treated for federal income tax purposes as described in subsection 
(e) or (g) of this section, a corporate member's distributive share of a 
limited liability company's items of income or loss is not included in the 
member's earned surplus or gross receipts for earned surplus to the extent the 
items would have been reported at the limited liability company level in 
accordance with the requirements of subsection (e) or (g) of this section.  The 
amounts excluded are limited to the amounts otherwise included in taxable 
earned surplus of the corporate member. 

(B) Distributions and/or withdrawals from a limited liability company described 
in subparagraph (A) of this paragraph are not included in earned surplus and 
are not considered gross receipts for apportionment purposes of the corporate 
member unless a gain is recognized by the corporate member for federal income 
tax purposes.  These distributions and/or withdrawals are apportioned based on 
the state of organization of the payor (limited liability company).

(3) For the purposes of the subsection, a corporate member includes a 
corporation as defined in the Tax Code, sec. 171.001(b)(3).


Effective Date:  May 4, 1998
Filed with Secretary of State:  April 14, 1998


  
Comptroller of Public Accounts




ACCESSION NUMBER: 9805405R   
SUPERSEDED: Y 
DOCUMENT TYPE: R 
DATE: 05/04/1998
TAX TYPE: FRANCHISE